Gross-Up: Definition and Application
A gross-up refers to the additional amount an employer adds to an employee’s compensation to account for taxes the employee would otherwise owe. This ensures the employee receives a predetermined net amount after taxes are deducted. Gross-ups are commonly used in executive compensation but can also apply in various other scenarios.
When and Why Gross-Ups Are Used
In certain situations, especially with special payments, employers may overlook the fact that the payment is taxable. Without a gross-up, the employee ends up receiving less than intended due to tax withholding. A gross-up ensures the employee receives the full intended net payment.
For instance, if an employee is supposed to take home $10,000 after taxes, the employer may need to issue a higher gross payment to account for the tax deduction, so that the net amount received still equals $10,000.
According to payroll specialists at Beyond, it’s critical for businesses to plan for gross-ups correctly, particularly when offering lump-sum payments such as:
- Signing bonuses
- Relocation reimbursements
- End-of-year or performance-based bonuses
Gross-ups are typically applied to one-time or irregular payments where a specific take-home amount is guaranteed. Companies that want to simplify this process often rely on payroll software or services like Beyond to calculate and manage gross-up payments accurately and stay compliant with tax regulations.
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